After more than a year and a half, the Pensions Regulator’s second consultation on the new DB Funding Code is expected in the next few months. 

In a third series of reports outlining the findings from its 2021 pension trends survey, the Association of Consulting Actuaries has found that there is strong support for seven key elements to be contained in the promised second consultation. 

The ACA is hoping the results will be taken into account by the regulator. “Having waited this long, the ACA urges TPR to continue listening to industry feedback, so that its new funding code doesn’t repeat mistakes of the past, like the disastrous Minimum Funding Requirement,” said chair of the ACA, Patrick Bloomfield. 

The first consultation, which set out what TPR expects from trustees and employers regarding defined benefit funding, proposed a twin track approach to demonstrating funding compliance: 'fast track' and 'bespoke'. 

Assessed by a range of quantitative tests, fast track involves passing these tests and is likely to lead to limited TPR scrutiny of the valuation. The bespoke route will allow for more flexibility but places the responsibility on trustees to explain and evidence how and why their approach differs from fast track, as well as their approach to managing and mitigating any additional risks.  

ACA’s survey found that 96% of respondents want a genuinely flexible bespoke option, and 72% do not want to benchmark a bespoke option against fast track. 

Furthermore, 78% say covenant should continue to be recognised in funding requirements, even for significantly mature schemes, as the consultation stated that trustees should reduce reliance on covenant over time, with reliance under fast track limited to what TPR consider the period a typical covenant is visible.  

The illustrative examples of potential bespoke scenarios provided by TPR do appear to show a willingness to allow innovation, provided relevant risks are adequately addressed, but the survey highlights a unified and strong industry opinion that “bespoke must mean bespoke”, according to Bloomfield.

Peter Williams, who chairs the ACA's pension schemes committee, said: “It is clear that there is very strong support for maintaining genuine flexibility in the new funding regime, and the consensus is against using fast track as a mandatory benchmark."

Almost nine in 10 of respondents say it must remain clear that trustees have absolute discretion over investment decisions. “Hopefully the anticipated regulations on the funding and investment strategy provisions of the Pension Schemes Act will help to clarify that this will continue to be the case,” said Williams.  

Regarding how contributions and investment returns interact, 91% want to be able to allow for anticipated additional returns in recovery plans, while 69% say contributions should not be required to bridge the gap between technical provisions and long-term funding targets, where additional returns are anticipated. Williams said this is one of the areas which “may be in some doubt”. 

More than half say it should be possible to allow for anticipated additional returns when determining future service contributions, but 26% were undecided.   

Further reports on ACA’S 2021 Pension trends survey’s findings are due to be published over the next month and a final report early in the New Year.